Q: We just hired a pastor, and he is purchasing a new home with a very large down payment. This will make the cost of his housing higher than his salary. How do we handle that?
How Should a Church Allocate a Housing Allowance?
A church should only designate a housing allowance up to the minister’s yearly salary. This assumes the minister qualifies for a housing allowance based on IRS requirements. The allowance must also:
- Represent compensation for ministerial services.
- Be used exclusively for housing expenses.
- Reflect the fair rental value of the home (furnished, plus utilities).
If the minister’s housing expenses exceed their salary, it is their responsibility to cover the difference through other means. However, the church cannot designate a higher allowance in anticipation of additional income earned outside the ministerial role.
Example: Housing Allowance vs. Total Salary
Let’s consider an example:
- Your minister earns $15,000 annually from your church.
- He anticipates housing expenses of $17,500 for the year.
The church can only designate up to $15,000 as a housing allowance. Even if the minister earns the additional $2,500 by working a part-time job, the church cannot include this external income in the designated housing allowance. Any additional income will be taxed like other payroll earnings, as it is not tied to the minister’s work at the church.
Key Takeaways
- The housing allowance must not exceed the minister’s salary from the church.
- Only income earned through ministerial services qualifies for a housing allowance designation.
- Additional earnings from non-ministerial jobs cannot be included in the housing allowance.
Additional Resources
For a comprehensive guide to church compensation, consider Church Compensation: From Strategic Plan to Compliance.
FAQs About Clergy Housing Allowance
What is a clergy housing allowance?
A clergy housing allowance is a portion of a minister’s compensation designated for housing expenses, including rent, mortgage, and utilities, that is excluded from taxable income.
Can the housing allowance exceed a minister’s salary?
No, the housing allowance cannot exceed the total salary paid by the church, even if the minister incurs higher housing costs.
What expenses can the housing allowance cover?
Eligible expenses include rent or mortgage payments, utilities, furnishings, and the fair rental value of the home. Non-housing-related expenses do not qualify.
Can additional income from non-church jobs be included in the allowance?
No, only income earned through ministerial services provided to the church can be designated as a housing allowance.
Conclusion
Churches must carefully allocate housing allowances based on the minister’s salary and ensure compliance with IRS guidelines. Additional income earned outside the ministerial role cannot be included in the housing allowance. For further guidance, refer to Church Law & Tax’s resources.
